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Who Controls the SEC?

In case you were wondering who dictates how the SEC will formulate its rules and regulations, we have received helpful insight from Dale Brown, president of the Financial Services Institute, which is the trade organization of independent broker-dealers.  FSI itself, he says, told SEC Chairman Jay Clayton how to structure its best interest proposal—aka the fiduciary harmonization rule.

There’s no doubt that the FSI has a lot of clout with the SEC, representing, as it does, organizations that sell many of the variable annuities and virtually all of the non-traded REIT shares in the financial services marketplace, and which have become the last bastion of sales commissions now that the brokerage firms have moved largely to account-based compensation.  In aggregate, sales reps and IARs affiliated with FSI member firms make up almost as many individuals as there are fee-only planners in the financial services marketplace—but they contribute much more to Congressional races and to hiring lobbyists, because, well, there’s a lot more money to be made in the sales activities than in giving advice solely for the benefit of the client (or, in a sales relationship, the customer).

FSI’s lobbyists have apparently not been shy about throwing their weight around the SEC halls.  An article published on the Financial Advisor magazine website (you can find it in the link at the end of this article) reports that Brown helped reporters understand the results of his organization’s advocacy work.  The SEC is busy following FSI’s proposals to create a “short-form” disclosure of conflicts of interest and compensation methods at the outset of a client/customer engagement, and has created a template, now approved by the SEC, that all firms and practitioners would use for disclosure.  And finally, FSI has given the SEC a blueprint for a single best interest standard of care.

Of course, tens of thousands of fee-only RIA firms—and not a few FSI-affiliated RIAs that work on a fiduciary basis—have been asking for standards that are stricter than simple disclosure of conflicts; they would like the SEC to require people who provide investment advice to the public to avoid conflicts altogether.  That, however, would interfere with commissions and sales-based compensation, so the FSI probably would not allow that.

Fee-only and fiduciary advisors also worry that a single best interest standard of care would water down the existing fiduciary standard framework (based on century of case law) with something that mixes disclosure with the FSI’s preferred “suitability” standard.  But the FSI has apparently waved that aside, and given the SEC a clear mandate to move ahead with a lower standard.

The article says that the FSI is also telling the SEC not to adopt a titles-based component to its proposal—and you can see why.  If all people providing advice were forced to adopt clear titles (advisor vs. sales agent), that would severely hinder FSI members’ ability to pose as “advisors” when their real agenda is to make sales of high-commission variable and equity-indexed annuities and non-traded REITs.  People might be less likely to accept, trustingly, their “advice” if the salesperson was required to self-identify as such, rather than as (as is the custom now) a financial advisor, investment advisor or financial planner. 

We are not told if the SEC has yet formally followed the FSI lobbying position on this issue, but Mr. Brown confidently told the reporters that he’s pleased that his organization’s hard lobbying work is coming to fruition, and that “One thing that Chairman Clayton has done is greatly narrow the SEC’s focus.”

The SEC’s proposal on fiduciary issues could be released sometime in the second quarter of this year, so there may be some lobbying yet to be done by the hard-working FSI team.  They told the gathered reporters that “they will continue to lobby against any proposal that differentiates between registered investment advisors and registered reps,” and incidentally mentions that they are fighting, legally and through their powerful lobbying group, to overturn the DOL Rule and require the Department Labor to “start fresh.”

With Brown so confident that he has the SEC in his pocket, it’s natural for advisors who believe in a true fiduciary standard, who would like retail investors to know who they’re receiving advice from, to feel discouraged.  What can they do to counteract a lobbying force so powerful that it can dictate SEC regulatory policy?

The only thing fiduciary advisors and their representatives can do is keep telling the truth as they see it about the conflicts (and harm) involved in sales activities, and to lobby, not on their own behalf, but on behalf of protecting financial consumers.  There may come a time when the SEC commissioners and staff come to realize that their first goal, their organization’s purpose, is to nurture “honest advisers” (as some of the 1940 Act’s founding papers put it) in a marketplace filled with “touts” who masquerade as advisors.  You have to hope that all the arguments about protecting existing business models and sales activities will finally, ultimately, fail as they continue to contrast with the what were once the core principles of the SEC. 

The FSI team may be telling the SEC what to do and how to regulate today, but going forward, we have to trust that the interests of financial customers will eventually come to the fore.